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How to pick the best investment fund is a priority for many people. For some advisors this is their main selling point.

Apparently, the African Wild Dog has a hunting success rate of 80%. They eat 8 out of every 10 times they put in the effort to hunt. That is an impressive track record.

The lion on the other hand is thought to enjoy only around a 20% success rate.

When trying to pick top-performing funds we like to believe we are wild dogs. In reality we are more like lions. Old lions. Solitary old lions.

Past performance

This is mostly because we tend to rely on past performance. The industry likes to publish fund awards and some people use this as a selection tool.

But these techniques do not serve us well. Statistically, the winner of the best performing fund over 3 years or even 5, is very unlikely to hold that position over a similar period going forward.

This is because funds that perform well over these periods, either have higher volatility (they use more risk), or they have a particular investment style which has just been through a market cycle that suits that style.

Some cautionary truths about investment returns 

• Returns tell you where you have been not where you are going. Hindsight is 20/20.

• They tell you nothing about the risk taken to achieve them. Downside.

• Returns don’t tell you if they were achieved via skill or luck. Repeatable.

• They are not linked to your objective. Were the investments appropriate to your goal?

• They don’t tell you anything about current market valuations.

• Often a very strong performance from a fund, asset class or investment is followed by a period of weakness. The cure for high prices is high prices.

• Returns can be used to tell a good story simply changing the time horizon of the analysis.

Better ways to pick investments

The biggest determinant of your future returns is the price you pay for the investment. 

What are you trying to achieve. What returns do you need to get there. Based on current valuations, is this investment likely to deliver on those returns. 

 

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It is not the drill that we want but the hole.

It is not the investment itself that has value, but rather what that investment allows or achieves which is most valuable.